Solutions to Midterm II, FIN 350, Spring 2011
Form
Answer
Form
Answer
A
B
A
B
1
2
D
14
15
A
2
4
E
15
16
C
3
5
A
16
14
A
4
1
C
17
18
A
5
6
B
18
17
C
6
3
C
19
19
C
7
8
A
20
20
B
8
9
B
21
22
A
9
7
A
22
24
B
10
10
D
23
21
D
11
12
B
24
25
B
12
13
E
25
23
E
13
11
C
26
26
E
Solutions:
1. Solution:
.
FCF model for valuing stock
Answer: d
Firm value = $25,000,000/(0.10 – 0.07) = $833,333,333.
This is the value of the whole company, including debt, preferred stock,
and common stock.
From this, we subtract the $200,000,000 in debt and preferred stock.
This leaves an equity value of
$833,333,333  $200,000,000 = $633,333,333.
So, the price/share =
000
,
000
,
30
333
,
333
,
633
$
= $21.11.
2.
Preferred stock concepts
Answer: e
MEDIUM
3.
Preferred stock yield
Answer: a
Annual dividend = $0.50(4) = $2.00.
r
p
= D
p
/V
p
= $2.00/$20.00 = 0.10 = 10%.
4.
.
CAPM
Answer: c
MEDIUM
Riskfree rate
7.00%
Old market risk premium
4.00%
New market risk premium
6.00%
Old required return
13.00%
Beta
1.50
New required return
16.00%
5. Standard deviation, historical returns (sample SD)
Answer: b
HARD
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Deviation
Squared
from mean
Deviation
2005
25.00%
10.00%
1.00%
2004
10.00%
25.00%
6.25%
2003
30.00%
15.00%
2.25%
15.00%
9.50%
Sum sqd deviations
4.75%
Sum / (N1)
σ
=
21.79%
SQRT of above
This is a relatively technical problem.
It should be used only if calculations are emphasized in class
or on a takehome exam where students have time to look up formulas or to use Excel or their
calculator functions.
6. Beta coefficient
Answer: c
MEDIUM
7.
Portfolio risk and return
Answer: a
MEDIUM
8. SML
Answer: b MEDIUM
9.
Market risk
Answer: a
MEDIUM
10.
CAPM and required return
Answer: d
r
RF
= r* + IP = 3% + 5% = 8%.
r
s
= 8% + (5%)2.0 = 18%.
11.
Coefficient of variation
Answer: b
The expected rate of return will equal 0.25(25%) + 0.5(15%) + 0.25(5%) = 15%. The variance of the expected return is:
0.25(25%  15%)
2
+ 0.5(15% 15%)
2
+ 0.25(5%  15%)
2
= 0.0050.
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '07
 Chen
 Finance, Dividend yield, market risk premium

Click to edit the document details